Lecture 9 Tutorial Questions - Solutions.pdf

# 2 and s113 in figure s112 the long maturity high

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Figures S11.2 and S11.3. In Figure S11.2 the long maturity (high strike price) option is worth more than the short maturity (low strike price) option. In Figure S11.3 the reverse is true. There is no ambiguity about the profit pattern for part (b). This is shown in Figure S11.4. Figure S11.2: Investor’s profit/loss in Problem 11.20a when long maturity call is worth more than short maturity call Figure S11.3: Investor’s profit/loss in Problem 11.20a when short maturity call is worth more than long maturity call K 1 K 2 Profit S T K 1 K 2 Profit S T

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Figure S11.4: Investor’s profit/loss in Problem 11.20b K 2 K 1 Profit S T
Problem 11.21 The variation of an investor’s profit/loss with the terminal stock price for each of the four strategies is shown in Figure S11.5. In each case the dotted line shows the profits from the components of the investor’s position and the solid line shows the total net profit. Figure S11.5: Answer to Problem 11.21 Profit S T K (a) Profit S T K (b) Profit S T K (c) Profit S T K (d)
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